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The 2013 Budget and Public Sector Net Bollocks

The 2013 Budget and Public Sector Net Bollocks (PSNB)

Chancellors have a distinct advantage on budget day as only they (and who they have leaked it to) know what’s in the budget and how all the numbers have been arrived at. This means the serious work of truly understanding the budget does not start until much of the media attention has gone away.

Yes this was a non-budget in many respects; however for me, it was instructive in how the methods used in the calculation of figures are more important than the figures themselves. In this case, as the (actually independent as opposed to the faux independent OBR) Institute of Fiscal Studies (IFS) note an awful lot of time and energy has gone into spinning the numbers for political reasons. Or, to be even less kind, the Treasury has put more effort into presenting the state of economy in a way that is favourable to the Conservative/ Lib Dem narrative than in actually dealing with the UK’s economic challenges. The pertinent quote from the IFS is:

There is every indication that the numbers have been carefully managed with a close eye on the headline borrowing figures for this year. It is unlikely that this has led either to an economically optimal allocation of spending across years or to a good use of time by officials and ministers.

Says it all really? Well no – there is much more to this.

Firstly the deficit. I have written before about how the ConDems claim that they have cut the deficit by a quarter through taking credit for the combined effect of Labour’s stimulus policies together with their own spending cuts, and that this was always likely to cause a drop in the deficit in the very short term; but also has the effect of neutralising the stimulus measures and adversely affecting the deficit in the mid to long term and we are already seeing signs of this in the OBR’s figures (if you look carefully). However first we must be very clear about what we are talking about when we say the deficit.

When the government talk about the deficit, they are specifically talking about Public Sector Net Borrowing (PSNB). The claim that the coalition cut the deficit by a quarter could be more accurately expressed as: PSNB reduced by just under a quarter (24%) between 2009/10 and 2011/12. The cause of this reduction is, as I have previously argued, a combination of taking PSNB at its highest point (and having peaked was already starting to decline) and comparing it with a period that came just after a combination of increased revenues (driven mainly by Labour policy) and spending cuts (caused mainly by ConDem policy) interacted to cause the short term reduction.

In addition to this, however we should question the measure of PSNB as a measure of the deficit. There are arguments for and against PSNB. Interestingly, although the government love this measure (at the moment) it has its origins in the EU/EC/EEC and its main purpose is to allow for international comparison of national economies, and not as a measure of a single national economy. Therefore the first question to ask is whether PSNB is really the right measure for the purpose of measuring the UK’s deficit. It is fine if we wish to compare with other EU countries but using it for any other purpose may be called into question. However I have two other reasons for disliking PSNB as a measure of the deficit.

1. The public, media and even the Prime Minister seem to have trouble grasping the difference between borrowing and the deficit. Therefore using something called Public Sector Net BORROWING as the measure of the deficit can only cause further confusion. The government are taking full political advantage of this confusion in order to push their inaccurate narrative that they are reducing borrowing and cutting the deficit (neither is actually true as of the time of writing) so one assumes they are quite content with this state of affairs.

2. PSNB is arguably bad accounting. The measure includes infrastructure spend and in traditional accounting spending for an asset is usually classed as an asset and not a liability and so should not be counted as part of the deficit (although interest on any borrowing to fund this spend is a liability and so part of the deficit). In fact Osborne is very happy to apply this principle when it suits him, as he did in this budget – in order to make the Help to Buy scheme appear ‘fiscally neutral’. Alex Hern explains:

The Treasury has budgeted £4.13bn for [Help to Buy]:

But the spending counts towards the central government net cash requirement, and it counts towards public sector net debt (Table 2.1 footnote 3, page 65), but it doesn’t count towards public sector net borrowing – also known as “the deficit”.

The reason is that the government is spending cash, but getting back an asset of equivalent value – in this case, equity in £20bn worth of houses. And when those houses are sold, the loan gets paid back. So assuming house prices continue rising faster than inflation – a fair assumption, given it’s basically government policy at this point – it’s not really even borrowing, just converting a liquid asset into an illiquid one….

Now if this argument applies to Help to Buy, in theory it should also apply to many things which are included in PSNB as well. It is essentially infrastructure spend and so there is no good economic reason for excluding it from PSNB. I would therefore suggest the reason for excluding is political. Yes that’s right Osborne has just decided (at a whim, it would seem) to exclude infrastructure spending he likes from the deficit and include spending he doesn’t like – not very scientific that! Ok …Ok there is a fig leaf economic argument around why Help to Buy can be excluded; but it is not a very good or convincing one frankly so I think it best to opt with the obvious explanation – political motivation – in this case.

I have a couple of other quick points to make.

I will not dwell on this as it has been widely reported (kudos to the BBC’s Stephanie Flanders who seemed to be the first to spot this – tweeted during the budget speech itself!) that if we ignore all Gideon’s jiggery pokery then the deficit (PSNB) has risen. This is no great surprise to anyone who has been keeping an eye on the figures.

My second point is that if you have agreed with me about PSNB being a dubious measure of the deficit then is there a better one? The answer is yes – a couple – and I try to keep an eye on them.

The Office of National Statistics keeps track of the Current Budget Deficit (the simple difference between current revenues and current outgoings) – however this only really gives you a snapshot. Perhaps a better one to look at is the OBR’s cyclically adjusted budget surplus – I would even go as far as saying this is the “REAL” deficit figure. This currently stands at -4.2% of GDP. In 2009/10 this was -5.3% of GDP. Therefore between 2009/10 and now the deficit has reduced by 20% as opposed to 29% (a ‘third’ in Gideon-Speak) if you use PSNB for the same period. Is it any wonder that the government choose PSNB as their measure of the deficit?

6 thoughts on “The 2013 Budget and Public Sector Net Bollocks”

Take a look at the document entitled ‘budget2013_distributional_analysis.pdf’ (snappy!) and check page 13 Chart 2.C. The Top have had the biggest hit but the Bottom have the next biggest hit. The 4th quintile have been cushioned the most.

Very good points. Notwithstanding the civil serviced code, officials at the Treasury are constitutionally bound to serve the government of the day, if only to stop the SPADS taking over, and to project the fiscal prudence required of a finance ministry. So you are rightly critical of civil servants’ publications. You might also put more emphasis on the changing composition between AME and DEL- paying for the effects of recession rather than attacking its causes, and examine the accounting treatment of depreciation. Not repairing a roof is not a saving, and holding up a bucket of drip water is not proof that the roof is being fixed.

All very good points – especially re. depreciation. The point that government spending is being driven by the recession rather than being used to generate growth is fundamental but is made elsewhere by better writers than I! I would add, on this point, however that it is not just that too much government spending is eaten by paying for bad economic policy, it is also paying for the effects of bad social policy (driven, of course by the fetish of austerity). I flesh out this last point a bit more here http://www.politicsworldwide.com/we-simply-cannot-afford-this-wasteful-government/ using the example of housing benefit and welfare reforms.